There are often upsides and downsides in any piece of legislation, especially when it comes to superannuation.
That’s the case with the Federal Government’s “downsizer measure” announced in the 2017-18 budget, which came into effect on 1 July, 2018.
A potential pension trap
Having enough money in retirement to maintain a comfortable lifestyle is obviously an aspiration for most Australians.
Longevity risk – the risk of running out of money in retirement – is a clear danger for many.
Yet, while the home downsizing measure may seem attractive for those aged over 65 wanting to get more into their superannuation or pension account to offset longevity risk, it also presents potential financial risks.
Those risks primarily relate to eligibility for a full or part Age Pension, because a large cash injection into a superannuation account may result in a breach of the assets test rules.
Consider that the family home is an exempt asset when calculating entitlements for the Age Pension, while all other assets outside of the home including superannuation are taken into account.
Under what’s known as the taper rate, Age Pension entitlements are reduced by $3 per fortnight for every $1,000 in assets over the Government’s asset test thresholds.
The current assets test limits are shown in the table below.
| Full Age Pension | Homeowner | Non Homeowner |
| Single | $263,250 | $473,750 |
| Couple | $394,500 | $605,000 |
| Part Age Pension | Homeowner | Non Homeowner |
| Single | $574,500 | $785,000 |
| Couple | $863,500 | $1,074,000 |
Source: Department of Human Services, limits effective 20 September 2019
The problem is that, in the current environment of record low interest rates and forecasts of lower investment returns for longer, some retirees could find that they are actually worse off.
Once an individual or couple breach the limits for the full Age Pension, their fortnightly payments will gradually reduce using the taper rate. Those on a part pension could find their payments cease altogether if they move above the maximum thresholds.
So, even with a higher superannuation balance as a result of their home sale, their total income stream could be less than what they received when they qualified for a full or part Age Pension.
Look before you leap
Average superannuation account balances at retirement already put many Australians close to the Age Pension assets test thresholds.
Using the data provided by the ATO, where the average downsizer superannuation contribution has been around $232,000, it’s likely that some of the individuals and couples that have taken up the measure will have breached the maximum assets test levels.
What’s most important for individuals and couples considering the downsizer measure is to review your personal circumstances to determine if it is going to work for you financially.
Do the numbers stack up? Keep in mind that any additional tax-free superannuation income earned in pension phase may be completely offset by a loss of Age Pension income if you breach the assets test rules.
For those wanting to downsize, how your home proceeds are reinvested, to maximise investment returns in retirement, is key.
It’s therefore essential to seek out professional financial advice before proceeding, especially with respect to social security means testing.
Please contact us on 1300 79 80 38 if you seek further assistance.
Conclusion
Following these steps can allow you to head into retirement with confidence and the necessary information to design the post-work life you desire.
If this article interested you and you would like to speak to Pat Casey on the phone, select a time to speak Pat – Financial Planner Sydney.
At Assure Wealth we specialise in helping busy, successful families structure their finances to achieve greater wealth and financial peace of mind.
Author: Pat Casey – Managing Director & Financial Planner Sydney – Assure Wealth
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